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Testimony of Assistant Secretary for Housing
Federal Housing Commissioner William Apgar
Committee on Government Reform
U.S. House of Representatives

March 23, 1999

Good Morning Mr. Chairman and members of the Committee. My name is William Apgar, and I am the Assistant Secretary for Housing/Federal Housing Administration Commissioner at the United States Department of Housing and Urban Development (HUD). On behalf of HUD Secretary Andrew Cuomo, I want to thank you for the opportunity to testify on the Federal Housing Administration (FHA), and specifically FHA's single family property disposition program, the focus of today's hearing.

FHA is one of the federal government's real success stories. Since 1934, FHA has helped more than 27 million American families become homeowners. We do this by insuring home mortgages, providing valuable credit enhancement that encourages private lenders to make home loans they otherwise would deem too risky. With the ability to take more risk by insuring low-down payment loans for families with less than perfect credit records, the FHA of today insures an additional more than 1 million loans each year, the vast majority going to first-time home buyers, racial and ethnic minorities, urban dwellers and other American families who would not otherwise have been able to buy a home. We currently have nearly 7 million loans with an unpaid principle balance of $420 billion in our portfolio - that's approximately one out of every eight American home owners today who bought their home using FHA insurance.

Perhaps most importantly, FHA provides this valuable service to the American homebuying public at no cost to the taxpayer. The insurance premiums we collect plus recoveries on properties sold from the real estate owned (REO) inventory exceed the cost of all insurance claims and operations. In fact, last year FHA contributed more than $1.5 billion toward balancing the national budget.

And the financial condition of the Fund is strong. A recent actuarial review performed by Price Waterhouse (PW) indicated:

  • FHA's Mutual Mortgage Insurance (MMI) Fund, which backs single family mortgages, exceeded statutory capital requirements in FY 1998 for the fourth year in a row. The capital ratio, a measure of the fund's cushion against unexpected insurance losses, was 2.71 percent, exceeding the Congressional target of 2.00 percent before the year 2000. This represents tremendous improvement in the capital ratio, which stood at negative 0.88 percent in 1990.

  • The projected economic value of the MMI Fund stood at $11.36 billion at the end of Fiscal Year 1998. This represents a more than $14 billion increase in the value of the Fund since 1990, when it was negative $2.7 billion.

Furthermore, Price Waterhouse reports that the FHA fund is well positioned to become even stronger. PW estimates that the MMI Fund capital ratio will increase to 3.4 and the economic value of the fund will grow to more than $14.635 billion in FY2000.


Under the leadership of Secretary Andrew Cuomo, FHA is implementing an aggressive set of Management 2020 Reforms. HUD is creating new and more effective ways for FHA to conduct its business. Instead of working out of 81 small and inefficient field offices, FHA now does business through four state-of-the-art Home Ownership Centers (HOCs). Working with Freddie Mac and Fannie Mae, FHA lenders and borrowers now have access to state-of-the-art automated underwriting systems, reducing from days to a matter of minutes, the time needed to approve an FHA borrower for a loan. And we have reformed and rationalized dozens of FHA loan origination requirements and procedures to make FHA more customer friendly and bring our operations more in line with private market practices.

FHA also is aggressively working with lenders to implement our new loan loss mitigation program, a Congressionally mandated program that offers borrowers in default five different options to avoid foreclosure. Finally, we are reforming our REO property disposition to take advantage of private sector expertise. On February 1 of this year, we contracted with seven private real estate professionals to provide comprehensive property management and marketing services for our portfolio of approximately 40,000 REO properties.

In short, FHA is streamlining operations, centralizing back-office functions and staff, investing in advanced technology and drawing on private sector expertise wherever possible. Secretary Cuomo is leading FHA into the 21st century, and turning it into a state-of-the-art mortgage insurance company.


In the course of doing business as a mortgage insurer, FHA takes ownership of some properties due to borrower default. When a default occurs, FHA lenders first try to keep the borrower in their home by pursuing loan loss mitigation. If these efforts are not successful, the lender forecloses on the home and conveys the property to FHA in exchange for payment of an insurance claim. Last year FHA took in some 70,000 properties, on our base of nearly 7 million loans, or approximately 1 percent of all loans.

FHA foreclosed (or Real Estate Owned) properties tend to be located in distressed communities, and they tend to be in relatively poor physical condition. The challenge for FHA is to see these properties in a manner that protects the government's financial interest and has a positive impact on neighborhoods where our properties are located. In the past we have attempted to do this by contracting with private firms to manage our properties, and using HUD staff to perform all marketing and sales activities. Using this approach, we sold more than 64,500 properties last year.

Over the last few years, FHA has explored new and innovative methods to improve its property disposition efforts. In 1997 we commissioned a comprehensive study of our property disposition operation by the management consulting firm, Andersen Consulting. The study noted that even though FHA has a number of competitive disadvantages relative to private sector REO operations, including the location and condition of our properties and cumbersome government regulations, FHA's performance compares favorably to industry norms. For example, Andersen reported that:

  • The industry norm for sales revenue is between 96 percent and 105 percent of appraised value, and FHA sells properties at an average of 95 percent of market value;

  • The industry norm for time in inventory according to Andersen is 120 to 180 days, compare to the current FHA average of 187 days; and,

  • The industry norm for cost of selling properties ranges between12 percent and 18 percent of market value, while FHA averages 15 percent.

So, while there clearly is room for improvement, the Andersen study confirms that FHA's operations already meet or closely approximate private industry benchmarks.

This study also refutes the HUD Inspector General's assertion that HUD delays in disposition are costing taxpayers $1 million a day on costs associated with property disposition. In their semi-annual report to Congress in September 1998 the HUD Inspector General states:

    "With HUD's estimated holding cost at about $29 per day and with more than
    41,000 properties in inventory, management delays in disposing of these
    properties are costing HUD over $1 million per day."

This statement is false and misleading. What the Inspector General fails to recognize is that these costs are not marginal costs due to delay, but rather are simply costs associated with any REO operation - whether a public agency or a private company. Last year the FHA REO property disposition operation grossed nearly $4 billion in sales, and the holding and sales costs were simply the cost of doing business. Moreover, according to Andersen Consulting, FHA's average property holding and sales costs (approximately $9,000 on an average appraised value of approximately $60,000), represent just 15 percent of appraised value, well within the industry standard of between 12 percent and 18 percent. FHA, like any organization with an REO property disposition operation encounters property holding and sales costs in the normal course of doing business. This is not noteworthy. The more relevant fact is that FHA's costs are squarely in line with private industry standards. Finally, it is worth reiterating that these costs, like all FHA expenses, do not cost taxpayers one penny, since the overall FHA operation actually generates net revenues. In fact, FHA generated more than $1.5 billion in revenue for the United States Treasury last year.

FHA is Reforming Property Disposition to Take Advantage of Private Sector Expertise

Building off the Andersen study, FHA moved to further improve operations. Over the last two years we have conducted a pilot demonstration to test an entirely new property disposition method that relies on private sector real estate professionals to perform all property management, marketing and sales activities. Rather than using private contractors to manage the properties and HUD staff to market properties, this approach utilizes private contractors to perform all management and marketing activities (or M & M activities), freeing HUD staff to focus exclusively on monitoring contractor activities.

This new approach is predicted on the belief that private sector real estate professionals can more efficiently manage and sell REO properties than HUD staff. The National Performance Review report on HUD completed in 1994, first suggested that FHA consider privatizing its REO operation. In that report, the NPR recommended that HUD:

    "Outsource its property disposition function in order to create higher returns. Private companies operating in a competitive market can normally provide a business service more efficiently than a government staff, which is protected from the rigors of competition. The management and disposition of problem assets is an essentially business, not government function´┐Ż.This is a suitable task for a business organization with its own money at risk and a clear profit motive tied to maximizing the net return on assets. This is not a suitable task for salaried government staff working from government rules and handbooks"

Mr. Chairman, we know this new contracting approach works. During more than two years of pilot testing in three locations - Baltimore, Maryland, New Orleans, Louisiana and Sacramento, California - private contractors proved able to sell REO properties more quickly and at a higher rate of return than HUD. Under the pilot the average time in inventory was reduced dramatically in all three locations, and the average property sales price and the net return to FHA increased dramatically in two sites and remained constant in the third (Sacramento, California), despite a downturn in the regional real estate market. Pilot results included the following:

  • The average time a property was in inventory was reduced from 211 days to 139 days in Baltimore; from 236 days to 132 days in New Orleans; and from 162 days to 122 days in Sacramento; and,

  • The average sales price per property increased by $17,108 in Baltimore and by $6,011 in New Orleans;

  • The net return to FHA per property increased by $13,695 in Baltimore and by $5,105 in New Orleans.

These results not only represent a dramatic improvement over FHA current operations, in most dimensions they meet or exceed the results obtained by other private sector REO sales efforts.

Implementing Management and Marketing Contracting Model Nationwide

Now, we are taking this successful model nationwide. Last August we issued a Request for Proposals (RFP) for sixteen contracts covering the entire country, that was met with tremendous enthusiasm from the real estate community and government watchdog agencies, alike. In what HUD's Chief Procurement Officer called one of the most highly competitive procurements HUD has ever conducted, we received more than 170 proposals from a number of highly-qualified private sector real estate professionals.

The HUD Technical Evaluation Panel, Chaired by the Director of our Denver Home Ownership Center (HOC), and staffed with a mix of senior field and headquarters REO staff, selected seven highly qualified contractors in January of this year, and FHA entered into contracts with these firms on February 1, 1999. Over the last several weeks we've been working with the contractors on a daily basis to ensure they will be ready to begin providing services on Monday, March 29, when they are scheduled to take over approximately 25,000 properties that are not currently under a sales contract.

Mr. Chairman, we also are confident that these well-qualified contractors will have strong incentive to perform. The M&M contract is incentive-based with the entire contractor fee set as a percentage of the net return on sale to FHA, creating the incentive to sell the properties at a fair market price. And at the suggestion of the HUD Inspector General, the contract minimizes pass through expenses to HUD by requiring the contractors to bear the bulk of the costs associated with maintaining the properties, creating a strong incentive to sell properties quickly.

To further improve the property disposition process, we also have added contract provisions that require contractors:

  • To use the Multiple Listing Service (MLS) to market properties, a requirement that should greatly enhance our marketing reach, create more demand for our properties and generate a higher return on sale;

  • To use electronic bidding to replace our previous sealed bid method that caused substantial delay in our process and was prone to human error;

  • To inspect every property with 24 hours of conveyance into our inventory;

  • To complete property appraisals within ten days of conveyance, to ensure properties are brought to market quickly.

M&M Performance Goals

Mr. Chairman, I believe this contracting model will greatly enhance our operations. By contracting with the best private sector real estate professionals and modifying our procedures to take advantage of the latest advancements in real estate industry practices, I believe we can dramatically improve our REO property disposition performance. Specifically, in the first year of operating under the M&M model nationwide, we aim to:

  • Reduce the average time we hold properties in inventory from our current average of 187 days to between 150 and 160 days; and

  • Improve our net return on sale, the percent of property market value we net after paying all costs associated with managing and selling the property, from our current level of 79.40 percent to 81.40 percent of property market value, an improvement that would generate additional revenues of more than $80 million annually for FHA.

However, these improvements will not just create dollar savings and boost the financial return to HUD, they will also mitigate any adverse impact our properties may have on neighborhoods.

The Comptroller General of the United States agrees that our transition to the M&M contracting model nationwide is likely to generate positive results. In assessing the contract model during the procurement process the Office of the Comptroller General at the General Accounting Office (GAO) said:

    "We conclude that the record supports finding that substantial benefits of cost savings and quality improvements will likely result from the consolidation of the previously contracted-out requirements with HUD's new requirements into contracts covering relatively large areas, and that these benefits go beyond reducing administrative and personnel costs alone. The expected improved program efficiency and quality, as well as the substantial potential cost savings, support the finding that the consolidation of the requirements under the M&M RFP approach was necessary and justified."

FHA Has Developed a Comprehensive Contract Management and Control System

With the transition to the M&M model, FHA staff will focus exclusively on monitoring contractor activities. Over the last eight months an interdisciplinary team of staff from FHA Headquarters and field REO division, the Office of the FHA Comptroller, the Office of Procurement and Contracts, and the Office of General Counsel have been working with the management consultant Booze-Allen & Hamilton to develop a new comprehensive system of management, financial and systems controls for the M&M contact environment. Our new monitoring and control system calls for FHA to:

  • Inspect the physical condition of 10 percent of all properties in the inventory on a monthly basis, using a combination of third-party contract monitors and FHA staff;

  • Audit 10 percent of all M&M contractor files on a monthly basis, employing a combination of third-party due diligence contractors and FHA staff. These audits will capture information related to the property inspection, appraisal, maintenance, listing, marketing, bids, sales contract and closing activities;

  • Complete on-site process observations at the M&M contractor's offices on a monthly basis, to ensure contractor staff are properly following specific contract requirements;

  • Conduct on-going analysis of results of all property inspection, file audit, and performance measure reports, including data on time in inventory and net return on sale;

  • Hold monthly performance reviews with the contractors, to assess critical performance measures, identify deficiencies and discuss corrective actions;

  • Prepare comprehensive contractor performance assessment reports for each contract area on a monthly basis.

FHA Headquarters staff also will support the system by conducting quarterly reviews of each HOC's REO operation. The objectives of these reviews are to confirm adherence to prescribed monitoring procedures, provide additional training to HOC REO staff as needed and share lessons learned from "best practices" of other HOC REO operations.

FHA is Creating New Partnerships with Local Governments and Nonprofit Organizations

In reforming our property disposition program, HUD also intends to maintain its long-standing commitment to working with local governments and nonprofit organizations wishing to purchase HUD-owned single family housing as part of a broader local strategy to provide and promote affordable housing in cities across the country. Last fall HUD worked with Congress to create a new approach to transfer FHA foreclosed homes located in revitalization areas to local government and nonprofit organizations.

This new approach, which was included in the FY99 HUD Appropriations Act, will include deep discounts on properties in revitalization areas to defer some of the cost of rehabilitation, and it will offer local government and nonprofit organizations unprecedented control over the neighborhoods they work in. Rather than simply offering properties for sale on a property-by-property basis, HUD plans to enter into broad agreements with local governments which will agree to purchase all FHA foreclosed properties within a specifically defined revitalization area, to be selected by both the local government and HUD. This will further focus federal and local resources on those neighborhoods most in need of public investment.

The FY99 HUD Appropriations Act also gave HUD critical new statutory authority to pay insurance claims in exchange for a note, a modification to our statutes that will pave the way for FHA to pursue a note sales approach to disposition on a broader scale. This alternative approach to property disposition could lead to even further savings once fully implemented. While implementing the M&M model nationwide, HUD/FHA are actively working with a number of external financial consultants to assess alternative program designs using these new authorities.


Finally, FHA recognizes the importance of helping FHA insured borrowers avoid foreclosure. Foreclosure avoidance not only helps keep families in their homes, it also benefits the FHA Fund in avoiding the costly process of selling REO properties. Over the last several months, FHA has taken a number of steps to reduce foreclosures. These strategies include:

  1. Facilitating greater use of FHA's loan loss mitigation program designed to provide troubled borrowers effective options to foreclosure, and thereby reduce the number of FHA defaults and claims;

  2. Enhancing FHA lender monitoring and enforcement activities;

  3. Developing automated systems to monitor insured loan performance and Specific enhancements in these areas include:
Facilitating Greater Use of FHA's Loan Loss Mitigation Program

FHA's new National Loss Mitigation Center located in Oklahoma City with thirty-seven staff dedicated to facilitating greater use of the loan loss mitigation program opened the Summer of 1997 and became fully operational in February, 1998. Staff in this new functional center focus solely on providing foreclosure avoidance counseling to FHA homeowners in default, performing on-site training and monitoring of high volume servicing lenders, and conducting large group training seminars for smaller loan servicers across the country.

The Center's work already is showing results. FHA is seeing a dramatic increase in the number of homeowners in default who are gaining access to one or more foreclosure avoidance options offered by FHA. In FY 1998, FHA helped nearly 11,000 homeowners take advantage of foreclosure avoidance options, with the number of assisted families increasing each month. During the first quarter of FY 1999 this new program has continued to gain momentum, as FHA lenders put more than 4,800 borrowers into one of the loan loss mitigation options. If this rate of use continues throughout the year, as FHA expects it will, then the program should serve approximately 20,000 borrowers this year, a remarkable increase over activity levels in previous years.

FHA also is beginning to see a marked increase in use of loan loss mitigation program options that keep borrowers in their homes. Of the more than 4,800 program cases during the first quarter of FY 1999, more than 3,600 cases, or approximately 75 percent of all cases, were options that keep the borrower in their home (options such as mortgage modifications, special forbearance or partial claims).

Moreover, HUD officials worked closely with Congress last fall to craft legislation creating new authority for FHA to impose financial penalties in an amount up to treble the amount of the outstanding insurance claim on lenders who do not follow FHA's loan loss mitigation requirements. This powerful new enforcement tool, which was included in the FY 1999 HUD/VA Appropriations Act, will greatly enhance FHA's ability to enforce existing program requirements and also should encourage even greater use of the loan loss mitigation program.

Enhancing FHA Lender Monitoring and Enforcement Activities

FHA has taken several steps to enhance its lender monitoring and quality assurance activities to ensure lenders are conducting quality underwriting of insured-loans, and servicers are thoroughly evaluating every candidate for the loan loss mitigation program. Since FY 1997, the Department has increased the number of lender monitors from approximately 23 to 154 monitors, and nearly doubled the number of annual on-site monitoring reviews from 256 to 440. For FY 1999, FHA has established a goal of performing 900 on-site reviews. This increase in activity, naturally, increases lender awareness of FHA program requirements, and is designed to improve lender performance and mitigate losses due to defaults and claims.

Developing Automated Systems to Monitor Insured Loan Performance

FHA has developed a new automated system for monitoring loan performance data by lender and geographic area. The Neighborhood Watch system, which was designed to track FHA insured loan performance by several different characteristics including the originating lender, the FHA loan program, specific loan characteristics, and geographic areas, was implemented nationwide in May, 1998. This new automated system gives FHA staff a powerful automated tool for monitoring defaults and making relative comparisons of lender performance.

Furthermore, FHA also is preparing to launch a new performance-based lender enforcement program. The Quality Assurance Division in HUD Headquarters is on schedule to restart the Credit Watch/Termination initiative in FY 1999. This initiative is designed to improve lender origination performance by regularly reviewing mortgagees' early payment default and claim rates by branch office within regional markets, and alerting mortgagees of deficient performance.

Finally, as part of the new Home Buyer Protection Plan announced by Secretary Cuomo in 1998, FHA is now piloting a new automated appraisal monitoring system. This new system will provide consumers the information needed to help them make a good home buying decision, and enhance FHA's capacity to identify and sanction those lenders or appraisers who would abuse the public trust by submitting inflated, incomplete, or misleading appraisal information to the potential home buyer or the FHA.


Finally, on another topic, I would like to thank Congressman Kucinich for alerting the Department to his concerns about the impact of the HUD Reform Act on the grant application review process. The HUD Reform Act is designed to "preclude giving an unfair advantage to applicants who would receive information not available to other applicants." However, as the Congressman pointed out, applications are sometimes rejected for narrow technical errors - such as checking the wrong box on a form - which seems to defy common sense.

Mr. Kucinich has proposed an amendment to the HUD Reform Act which would clarify the ability of applicants to correct these kinds of ministerial omissions or errors. The Department will also take administrative action to provide clearer guidance to applicants and HUD staff regarding notification of technical errors in applications for HUD grants. We believe that these actions will address the concerns raised by Congressman Kucinich and other members of the Committee, and we are pledged to continuing to work with the Committee on this issue.


Mr. Chairman, I would like to thank you for this opportunity to testify today. I would like to conclude by reiterating that I believe HUD and FHA reform is headed in the right direction. I am excited by the prospect of launching the M&M model nationwide, and I look forward to reporting back to this Committee and other members of Congress on the program results. Thank you and I look forward to answering your questions.

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